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Food Processing Prospers

By catering to niche markets and expanding their use of technology, U.S. food manufacturers are staying ahead of global challengers.

Aug/Sep 06
With growing worldwide competition, the food industry is looking at new ways to remain viable and productive, including implementing state-of-the-art technology, continuing to expand overseas, and increasing their focus on niche marketing.

According to the U.S. Department of Commerce's (DOC) Office of Health and Consumer Goods, the food manufacturing industry accounts for more than 10 percent of all manufacturing shipments, making it one of the United States' largest manufacturing sectors. From 1997-2004, the DOC says the processed food industry experienced steady growth, with 2004 posting the value of food shipments at $511.5 billion, an increase of 21 percent from 1997.

Going to Market
According to Food Processing magazine, the 10 largest U.S. food companies in 2005 were Tyson Foods, Kraft Foods, PepsiCo, Nestle, ConAgra, Anheuser-Busch, Dean Foods, Sara Lee, Mars, and Smithfield Foods. However, smaller companies are exercising increasing clout to level the playing field, according to David Zepponi, president of the Northwest Food Processing Association in Portland Oregon.

"We are looking at achieving a new equilibrium between the niche and the commodities (traditional) food manufacturers," he says. "Each of them supports the other, which is essential for the survival of the industry."

One of the strongest growth niche markets today is organic food, which grew an estimated 20 percent per year through the 1990s, according to the U.S. Department of Agriculture (USDA). Organic foods have become so popular that they can now be found in traditional supermarkets, natural food stores, and other retail markets. The USDA estimates that retail organic product sales accounted for more than $10 billion in the United States in 2003 and sales are expected to grow 9-16 percent per year through 2010.

Ethnic foods are also driving the niche market, according to the DOC. For instance, the Hispanic population continues to increase, and many processed food companies are developing new products for this population. Also, many traditionally ethnic food products are crossing over into the mainstream population.

Location, Location, Location
Not surprisingly, the processed food industry is a major player in the global economy, with more than one-third of the world's top-50 food and beverage processing firms headquartered in the United States, according to Food Engineering magazine. Major foreign competitors include Nestle (Switzerland), Unilever (England), Kirin Brewery (Japan), Cadbury Schweppes (England), Heineken (Netherlands), and Asahi Breweries (Japan). "Food processing and agriculture is a global industry, and our true competition is regions around the world," says Zepponi. He cites China, Chile, Australia, New Zealand, and Canada as examples.

Craig Wyvill, division chief and senior research engineer in the food processing technology division at the Georgia Tech Research Institute, says that despite global competition, the United States is still in the driver's seat when it comes to the food processing industry. "In some food markets, we have a decided advantage domestically because our food processing plants are here in the U.S., and some products don't necessarily travel well," he says. "We have a fairly healthy domestic market, and our processors are taking full advantage of that."

Steve Hensley, president of Blue Sky Logistics, a supply chain software company, agrees that location can be important. "You have to have grocery stores where the people are, and distribution centers need to cluster around where a company's stores are located," he says. He points to companies now locating their distribution centers in rural areas where operating costs tend to be more inexpensive, while others are locating their operations near ports because much of their business is done overseas.

"Local companies in our three-state region [Washington, Oregon, and Idaho] view themselves as competitors, but they are friendly competitors in that they work together to solve larger global issues," says Zepponi. "When you are competing against a major economic system somewhere on the globe, you need to be at strength with them or better than them in order to compete well. So we are collaborating to improve our productivity."

Food processing manufacturers, particularly those located in the Southwest, also now have easier access to the Mexican markets, thanks to the North American Free Trade Agreement (NAFTA). NAFTA has eliminated most tariffs on U.S. processed food exports, which were as high as 20 percent before NAFTA took effect. Today, U.S. manufacturers enjoy a price advantage over competitors, who are required to pay an average 24 percent tariff in Mexico's market.

Mergers, Acquisitions, and Employment
According to the Food Institute, the food manufacturing industry completed 320 mergers and acquisitions in 2005, down slightly from 395 in 2004. An additional 75 were announced but not completed by the end of 2005.

Wyvill notes that the industry is indeed compressing, and soon a handful of companies may control a dominant share of the market. However, he sees continued opportunities for smaller companies to take niche markets away from the larger food processing companies because of their ability to better focus on available niche opportunities. "I think there are going to be healthy markets in those niche areas for smaller companies to continue to operate," he says.

Employment Trends
According to the Bureau of Labor Statistics (BLS), employment in the food processing industry declined six percent from 1996 to 2005, which represented a decrease from 1.56 million to 1.47 million people. Better technology and automation allowed companies to increase production while relying on fewer employees. The BLS expects overall wage and salary employment in food manufacturing to increase by four percent over the 2004-2014 period.

As might be expected, California employs the largest percentage of workers in the industry, making up 11 percent of the industry work force in 2005, according to the DOC, which also reports that Texas, Illinois, and Pennsylvania employed significant percentages of the food processing work force.

In 2005, the U.S. processed food industry exported $28.8 billion of product and imported $29.8 billion. Meat products and meat packaging products made up the largest share of the $29.8 billion in overall processed food imports (22 percent). This was followed by fruit and vegetable preserves and specialty foods (16 percent), sugar and confectionery products (14 percent), miscellaneous foods (14 percent), and grain and oilseed milling products (13 percent). Five countries accounted for 52 percent of U.S. imports of processed food products in 2005: Canada (29 percent), Mexico (8 percent), China (5 percent), Australia (5 percent), and New Zealand (5 percent), according to the DOC.

The United States is the world's largest exporter of processed food. The DOC reports that meat products and meat packaging products also made up the largest share of the $28.8 billion food exports (33 percent). This was followed by grain and oilseed milling products (22 percent), miscellaneous foods (15 percent), and fruit and vegetable preserves and specialty foods (10 percent). According to the USDA, in 2005, five foreign countries accounted for 62 percent of U.S. processed food exports: Canada (23 percent), Mexico (19 percent), Japan (12 percent), China (4 percent), and Korea (4 percent).

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